Thursday, January 6, 2011

One of the biggest mega trends happening in America is the bifurcation of society between the haves and the have nots. Many of the jobs the 'underclass' once did are gone forever, while others spent freely when times were good, and when the tide turned have little buffer. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] After all, saving for a rainy day is what boring people do. Others really never got off the ground, as the K-12 education system has degraded dramatically the past few decades. Frankly the underlying trend - as bad as it is on the surface - has been hidden by multiple bubbles, and most recently a level of government assistance never seen before. [Nov 5, 2010: USA Today - Anti-Poverty Programs Surpass Cost of Medicare] In terms of government spending, this brings up a host of issues as any changes to the social safety net are going to be send millions past GO and directly to impoverished. (and yes there are people gaming the system, but not tens of millions). There are myriad societal effects of the transformation of America from a relative egalitarian society in the 1960s to a 2 or 3 class system - but those are topics for other posts we have done.

The official U.S. government tally of who is living in poverty is a joke. We last looked at it about 16 months ago [Sep 19, 2009: US Poverty Rises to 11 Year High - But Still Vastly Understated] For example, if you make $23,000 for a family of 4 - you are not in poverty. If you are single and make $14,000 you are not in poverty. I'm not sure in what counties ex rural Mississippi you can accomplish that cost of living but apparently the government believes a middle class lifestyle is available at $25K for a family of 4 in all of America. Or at least it would be inconvenient to admit otherwise. And yes once more let me put the caveat that being "poor" in America is different than being poor in Malawi, but in theory we should be comparing ourselves to other first world countries.

The AP has an interesting report of a new measure of poverty in the U.S., based on the census. It has a different band of parameters and shows an increase over the government's incredibly generous definition of poverty. As striking is the large increase in those in the over 65+ camp who fall into poverty. Due to our consumption culture (encouraged by the government at every turn, since we've transformed our economy from good producing to services and consumption) many are entering the golden years with little to nothing. Where once many had their mortgage paid off by the time they retired and hence could live on a much lower income as their largest expense was eliminated, now after a generation of serial refinancing and cash out to finance buying 'what we deserve', many still have the mortgage to worry about even at age 70+. There are many other factors we've discussed often - i.e. the move from pensions to do it yourself savings in a country where saving is a sin and spending is worshiped, the disaster that is the 401k system, etc. Unlike the mortgage crisis which is playing out in a relative short period of time (6-8 years), this grand economic experiment of running an economy on consumption & services (you do my nails, I'll cut your hair, you serve me a beer, I'll cut your lawn, you build a house, I'll default on it) is taking decades to play out. But we're starting to see the first wave of results the past 5-10 years, and it's not pretty.

Bigger picture there are enormous stresses being formed at the bottom end of the society, and more and more are being caught in the net. Anyone who truly believes there will be any serious spending cuts at the federal level does not realize the (increasing) dependency that has been created by the a multitude of poor decisions over the past few decades. Indeed we fast approach the time when 1 in every 5 dollars of "income" are government transfers. [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High] At this point, the genie is out of the bottle and with a dysfunctional government whose only solution is layer on more debt to kick the can down the road, our modern day plutonomy only grows in power. [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy] However, there appears nothing to be worried about since we've been well trained to parrot the fact that as long as the S&P 500 only goes up, everything in America is fine. Nothing to see here, move along (buy stocks as you are moving of course).

The number of poor people in the U.S. is millions higher than previously known, with 1 in 6 Americans -- many of them 65 and older -- struggling in poverty due to rising medical care and other costs, according to preliminary census figures released Wednesday.

At the same time, government aid programs such as tax credits and food stamps kept many people out of poverty, helping to ensure the poverty rate did not balloon even higher during the recession in 2009, President Barack Obama's first year in office.

Under a new revised census formula, overall poverty in 2009 stood at 15.7 percent, or 47.8 million people. That's compared to the official 2009 rate of 14.3 percent, or 43.6 million, that was reported by the Census Bureau last September.

Across all demographic groups, Americans 65 and older sustained the largest increases in poverty under the revised formula -- nearly doubling to 16.1 percent. As a whole, working-age adults 18-64 also saw increases in poverty, as well as whites and Hispanics. Children, blacks and unmarried couples were less likely to be considered poor under the new measure.

The new measure will not replace the official poverty rate but will be published alongside the traditional figure this fall as a "supplement" for federal agencies and state governments to determine anti-poverty policies. Economists have long criticized the official poverty measure as inadequate because it only includes pretax cash income and does not account for medical, transportation and work expenses. (much like inflation, as long as you don't eat, use energy, pay for healthcare, or have kids in college - you are fine. For poverty as long as you don't go to the doctor, need to drive to work, need daycare, or wear clothes at work - your income is sufficient)

"Under the new measure, we can clearly see the effects of our government policies," said Kathleen Short, a Census Bureau research economist who calculated the revised poverty numbers. "When you're accounting for in-kind benefits and tax credits, you're bringing many people in extreme poverty off the very bottom."

The official measure is based on a 1955 cost of an emergency food diet and does not factor in other living costs. (that is perverse) Nor does it consider non-cash government aid when calculating income, which surged higher in 2009 during the recession.

The effect was seen most notably among older Americans. Under the official poverty rate, about 8.9 percent lived in poverty, mostly because they benefit from Social Security cash payments. But when taking into account out-of-pocket medical expenses and other factors, that number rises to 16.1 percent.

Among the findings:
--Without the earned income tax credit, the poverty rate under the revised formula would jump from 15.7 percent to 17.7 percent.

--The absence of food stamps separately would increase the poverty rate to 17.2 percent.
--Taking into account millions of uninsured people in the U.S. had little effect in increasing poverty, mostly because those without insurance tend to forgo medical care rather than find ways to pay for it.

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